Foreign Relations of the United States, 1977–1980, Volume VIII, Arab-Israeli Dispute, January 1977–August 1978

130. Minutes of a Policy Review Committee Meeting¹

Washington, October 13, 1977, 4:50–6 p.m.

SUBJECT

• Secretary Blumenthal’s Trip to Middle East

PARTICIPANTS

• State
• Philip Habib (Chairman)
• Richard N. Cooper
• Sidney Sober
• Defense
• Charles Duncan
• Leslie Janka
• OMB
• Randy Jayne
• Treasury
• W. Michael Blumenthal
• Anthony M. Solomon
• C. Fred Bergsten
• Lewis Bowden
• Commerce
• Frank Weil
• Energy
• Harry Bergold
• JCS
• Lt. General William Smith
• CIA
• Robert Bowie
• David Blee
• NSC
• Samuel Huntington
• Gary Sick (notetaker)
• Timothy Deal

Mr. Habib opened the meeting by providing some general background on Secretary Blumenthal’s proposed trip to the Middle East, which would provide a chance for him to see leaders in the Middle East and to give them a chance to get to know him. Secretary Blumenthal indicated that from his point of view the trip was essentially to meet the Saudi Arabian leaders and to attend the Joint Commission meeting there.² Also it was an opportunity to become personally acquainted with the Ministers of Finance of the various countries, with particular reference to their financial role and issues involving oil pricing. He wanted to discuss the oil price problem with Middle East leaders and to create a bond between himself and the various leaders in the area, or in the case of Iran, to recreate that bond, which had become rather strained during the last Administration. In the case of Egypt he wanted to discuss economic assistance and development; and in Saudi Arabia, also to focus on financial aspects of petrodollars. Mr. Solomon and Mr. Bergsten would also have the opportunity during this trip to develop personal contact with their counterparts. Mr. Solomon noted that a U.S. committee on the boycott had just returned from the Middle East and had discovered that the Arab governments were better posted than US businessmen in general about the effects of the boycott and had clearly expressed a desire to accommodate the new rules in order to maintain their business links with the United States. Mr. Habib briefly reviewed the President’s forthcoming trip and noted there would be a fuel stop in Saudi Arabia in addition to the announced format. The President’s trip will come shortly after Secretary Blumenthal’s trip and shortly after Prince Saud and the Shah visit the United States. State will relay background information on Prince Saud’s visit to Secretary Blumenthal since he will be in the Middle East at the time that meeting takes place. Mr. Habib reviewed the current status of the peace process and the working paper which had been presented to Israel. He expected Secretary Blumenthal to encounter the most difficult questions about the peace process during his visit to Israel. He did not expect very intense questioning by any of the other countries. There were four points which needed to be made in response to these questions: first that the United States commitment to Israel’s security remains firm; that there will be no use of economic and military pressure on Israel; that we continue to stand by Resolutions 242 and 338; and that we continue to stand by the commitments made during the Sinai II Agreement in 1975. The key words on the peace settlement are “comprehensive, just and durable.” Secretary Blumenthal noted that in Israel he plans to talk primarily on economic matters and to try to keep it to that.

Mr. Habib then turned to the economic side, noting that Secretary Vance feels strongly that there should be no cut in the present level of economic assistance to any countries involved in the Arab-Israel dispute during the current peace process, taking Israel as the baseline country. He reviewed briefly the military sales package which is being considered for Egypt in the Congress at the present time and also reviewed the MIG maintenance program which is being considered. Mr. Sober recalled the IMF reforms adopted by Egypt, the reduction of some subsidies, and the subsequent riots which followed earlier in 1977.³ Mr. Habib summarized President Sadat’s difficult position; his military forces are running down, and the peace process must bear fruit within the next five to six months or he will be in serious trouble. He also noted that there has been some dissatisfaction evidenced on the AID program in Egypt which will be covered in the Secretary’s briefing book. He then turned to Israel. Secretary Blumenthal asked about the proposed offset arrangement on defense procurement by Israel. General Smith noted that Israel wants us to buy defense goods from Israel in proportion to their purchases from the United States. DoD does not agree with this approach. Mr. Cooper asked how we could square our opposition to this with the arrangement we have with the Swiss which is comparable. Mr. Weil noted that the Swiss arrangement is not a formal U.S. Government arrangement, but is commercial. General Smith noted that the basic difference is that we are writing off Israel’s credits which is quite different from actual purchases from the United States. Mr. Habib said that Mr. Sober would provide a coordinated paper on this issue in time for the trip. Israel is requesting a level of aid of $2.3 billion instead of $1.7 billion. He noted that during last year we had transferred $100 million to budget support from the commodity program and that we should get credit for that in his talks with the Israelis. He also felt that Secretary Blumenthal should attempt to deflate expectations of a significant rise in economic support. Mr. Janka noted that the Israelis want a memorandum of understanding to formalize an offset agreement. The United States will procure defense goods from Israel as possible, and we will make our best effort to procure from them, but we do not want to formalize this agreement. Secretary Blumenthal asked what level of procurement we have now and Mr. Janka and General Smith said they would check that out and make sure it was available to him in time for the trip. Mr. Habib noted that Israel has an arms industry and, using US components, produces a number of military systems for sale abroad. Because of our participation we have the right to approve or disapprove sales to third countries. We object to sales to Latin America of equipment that we would not ourselves sell there. He expected the Israelis to raise this issue and to pursue it particularly in terms of balance of payment problems, unemployment, production, and so forth. The Israelis would argue that there should be no objection to selling Kfir aircraft in Latin America when they are going to turn to the French and buy Mirages anyway. On the Chariot Tank we agreed to use FMS credit to develop Israeli production facilities.⁴ Now the Israelis would like to extend this arrangement to other areas. However, we indicated at the time of the Chariot agreement that this was a one-time exception and should not be extended to other areas. Secretary Blumenthal wondered what the immigration situation is at the present time. Mr. Habib noted that we have talked quietly to the Soviets on this; there have been some results—the numbers are up and Begin is aware of this fact. Mr. Janka noted that the Israelis have recently presented us with their Matmon C proposal for defense planning⁵ over the next decade and it will take us at least 90 days to study that. So, in response to defense procurement questions, the Secretary could always say that we are studying Matmon C.

Mr. Habib then turned to Kuwait, noting that it was generally neglected but extremely important in terms of oil production and financial aspects. Mr. Cooper noted that Kuwait is not a moderate on oil prices and has closed in some of its production. Mr. Solomon wondered whether the Kuwaitis in fact have a significant margin of increase available. Mr. Bowie said yes, but he would check out the details. Mr. Cooper said that this is the first contact with Kuwaitis at this level and it is important to make our arguments clearly as far as production is concerned. General Smith noted that the Chief of Staff of the Kuwaiti Armed Forces was here last week. He is looking for more military equipment to purchase from the United States; but the United States has been urging restraint. Mr. Solomon wondered whether there are any sticks or carrots we could use in support of our arguments on oil pricing. This would apply to all countries, not just Kuwait. Mr. Habib noted that Saudi Arabia in particular is responsive to the dangers of inflation and the effects on developing countries of oil price increases. Mr. Sober noted that there were no sticks or carrots to be used in Kuwait and that he could expect some very sharp discussion from Oil Minister Atiki. The best approach would be to focus on the effects of oil price increases on the United States’ economy and the consequent effect on the dollar and the Kuwait portfolio.

Mr. Habib then turned to Iran and the Shah. Secretary Blumenthal wondered how to approach the price issue with the Shah. Mr. Cooper suggested that the Secretary had best be the “heavy” on this subject since the President was not likely to be good in pressing the Shah on this issue. Secretary Blumenthal noted that he hoped to talk to the President on the risks involved in oil price increases and would try to do this in a worldwide context. Mr. Habib noted that the Shah has a prickly character. He suggested that the Secretary avoid discussions on the F–16, the F–18L and other major arms sales questions.⁶ Secretary Blumenthal wondered what were the relations between Israel and Iran. Mr. Habib noted that the relations were quite important, particularly in terms of oil supply to Israel. Iran’s relations with South Africa may provide a way of putting the squeeze on South Africa; however, this should not be raised at this time. The Shah is no longer pushing for nuclear reprocessing and may soon initial a nuclear agreement with the United States. He then turned to Saudi Arabia.

Mr. Sober noted that Secretary Blumenthal is scheduled to participate in an inauguration project in Jubail, which would be a very good gesture and appreciated by the Saudis. Mr. Habib reviewed for the Secretary the significance of the separate Saudi armies—the regular army and the national guard—in the internal politics of Saudi Arabia. He noted that the Saudis will probably raise the question of the Horn of Africa, where we don’t want to get involved in arms transfers; but we are with them in trying to get rid of Soviet influence. In relations with the PDRY we try to follow the Saudi lead. On arms transfers, Saudi Arabia wants F–15s, which we have promised; but this is going to give us extreme difficulty with the Congress in trying to get it approved. Mr. Cooper noted that it would be useful to have a chronology on the history of arms transfers to Saudi Arabia. Mr. Janka noted that he would take care of that prior to the trip. Mr. Sober noted that he would be there and is up to date on this information. Mr. Solomon asked what were Saudi Arabia’s relations with the Shah and Mr. Habib noted that they were good. Secretary Blumenthal said he would like to keep up with late developments up to the time of his visit. Mr. Cooper noted particularly that we will need a scenario on oil and oil pricing. Mr. Solomon noted that we want to head off any price increase in 1978. Secretary Blumenthal agreed, noting that a five percent increase would equal an additional $5 billion balance of payments deficit for the United States. Mr. Solomon noted that there is a strategy paper due next week on this subject. Secretary Blumenthal again noted that he would talk to the President on this subject, noting that a price increase will really hurt this time.

Mr. Habib closed the meeting, noting that the timing of the Secretary’s visit was very appropriate and that he thought it would be extremely worthwhile to maintain contact with the various Middle East leaders at this level at such a key time in our Middle East strategy.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Country Chron File, Box 32, Middle East: 1–2/79. Secret. The meeting took place in the White House Situation Room.
2. A reference to the U.S.-Saudi Joint Commission on Economic Cooperation, which was first announced on June 8, 1974, by Secretary Kissinger and Prince Fahd. The first meeting of the Joint Commission was held February 26–27, 1975, in Washington. Blumenthal visited the Middle East October 22–29 primarily to discuss oil prices. See Foreign Relations, 1969–1976, vol. XXXVII, Energy Crisis, 1974–1980, Document 134.
3. See footnote 17, Document 3.
4. See footnote 9, Document 57.
5. Matmon C refers to a list of military equipment presented to the United States on October 3. This had been preceded by Matmon B, which Israel had submitted after the October 1973 Arab-Israeli War and which the United States approved during the Ford administration. See Foreign Relations, 1969–1976, vol. XXVI, Arab-Israeli Dispute, 1974–1976, Document 260. Matmon is the Hebrew word for “treasure.”
6. Presidential Directive 13 limited U.S. arms sales to various countries, including Iran. For example, 250 F–18L fighters intended for sale to Iran had been canceled because of this directive in June. (Los Angeles Times, June 2, 1977, p. 1) PD–13 is Document 33.